Between gunfire in the Middle East and the countdown to increased production: Which side of risk is palm oil being priced in?
2026-04-13 18:50:35
On Monday (April 13), Malaysian palm oil futures on the Bursa Malaysia Derivatives Exchange (BMD) saw a technical recovery after a sharp decline in the previous trading day. The benchmark June contract closed at 4,557 ringgit per metric tonne, up 19 ringgit, or 0.42%. The intraday trading range was between 4,547 and 4,598 ringgit, generally showing a consolidation pattern of rising and then retracing to the moving average. The previous trading day (April 10), the contract recorded a significant drop of 2.26%. Today's rebound reflects more the reinjection of risk premiums triggered by geopolitical variables than a substantial reversal in supply and demand fundamentals. Meanwhile, competing edible oils showed divergent performance: the Chicago Board of Trade (CBOT) soybean oil futures contract rose 1.33%, while the Dalian Commodity Exchange (DCE) palm oil contract weakened by 1.47%, reflecting a temporary misalignment in regional market pricing logic.
The core driver of today's market rebound stems from renewed tensions in the Middle East. Following the failure of negotiations between the US and Iran in Islamabad, the US Navy's preparations to intercept ships passing through the Strait of Hormuz pushed international crude oil prices back above $100 per barrel. For the palm oil market, the strength of crude oil has directly reshaped the price advantage of biodiesel – the narrowing POGO spread (the price difference between palm oil and gasoline) has significantly improved the economic viability of palm oil as a biodiesel feedstock.
Paramalingam Supramaniam, director of brokerage firm Pelindung Bestari, interpreted this as follows: "The renewed escalation of tensions in the Middle East has reignited buying interest in the market, and traders are re-incorporating risk premiums into the price system after Friday's sharp sell-off." However, Supramaniam immediately warned, "Demand-side constraints and better-than-expected supply performance will limit upside potential in the coming trading days." This assertion accurately captures the current stalemate between bullish and bearish forces in the market—macro-geopolitical premiums and micro-level supply and demand easing are vying for dominance at different timeframes.
The Malaysian Palm Oil Board's (MPOB) March supply and demand report, released last Friday, formed a significant backdrop to the previous price decline. Data showed that end-March inventories fell 16.2% month-on-month to 2.267 million tons, marking the third consecutive month of decline and reaching a seven-month low. However, this decline was still significantly higher than the upper limit of the previous forecast (market expectations were around 2.18 million tons). The discrepancy stemmed from the combined effect of better-than-expected production (up 7.2% month-on-month to 1.377 million tons) and slightly lower-than-expected domestic consumption.
It is worth noting that exports in March surged 40.6% month-on-month to 1.551 million tons, partly benefiting from the "demand shift" effect of Indonesia's increased export tax rate, and also including concentrated stockpiling before Ramadan. With the production increase cycle approaching, the market expects April output to see double-digit month-on-month growth, while export momentum is unlikely to continue the strength of March – shipping survey agencies estimate that exports in the first 10 days of April will plummet by 30.7% to 38.9% month-on-month, a leading indicator that is putting downward pressure on prices in the longer term. Zhang Rufeng, a senior researcher at COFCO Futures Research Institute specializing in oils and oilseeds, pointed out that Malaysia is entering the production increase season with over 2.2 million tons of inventory, creating relatively clear pressure, and the market is currently speculating on whether an inventory inflection point will form in April and May.
The demand side is sending warning signals to the market. Data from the Solvent Extractors Association of India (SEA) shows that India's palm oil imports in March fell by approximately 19% month-on-month to 689,000 tons, the lowest level in three months. Following the global rise in palm oil prices in tandem with the energy market, import profits for Indian refiners have been significantly squeezed, leading to a more cautious purchasing attitude.
This shift reflects a deeper logic: the premium of palm oil over soybean oil is eroding its market share. In India, the world's largest importer of edible oils, the contraction in purchasing by price-sensitive buyers indicates that the negative feedback mechanism of high prices on demand has begun to take effect. Kenanga Investment Bank, in its report, offers a noteworthy perspective—the low elasticity of exports to high prices in March (i.e., price increases did not suppress purchasing) reflects buyers' food security anxieties stemming from the Middle East conflict, with countries excessively building up inventories to hedge against potential supply chain disruptions. The institution thus concludes: "Regardless of whether a ceasefire is reached in the current Middle East conflict, buyers are expected to maintain restocking activity for one to two quarters, and the supporting demand for edible oils will continue."
Public Investment Bank added to the bullish argument from the perspective of regional supply contraction: Thailand and Indonesia's policy orientation of prioritizing domestic biodiesel projects is tightening the availability of regional exports, coupled with the potential weather risks of El Niño, which is expected to provide solid support for CPO prices. The institution maintains its forecast of an average CPO price of 4,400 ringgit/ton for the whole year and gives the plantation sector an "overweight" rating.
In summary, the current palm oil pricing system is composed of two intertwined main lines: the first is the energy-vegetable oil transmission chain derived from the situation in the Strait of Hormuz, which provides downward support for prices in terms of sentiment and relative pricing; the second is the supply and demand rebalancing pressure formed by the arrival of the production increase cycle and the suppression of demand by high prices, which restricts the upward elasticity of prices.
The following variables need to be closely monitored going forward: First, whether the April MPOB production data can validate the expected increase in production. If the month-on-month increase significantly exceeds seasonal patterns, the confirmation of an inventory inflection point will put pressure on near-month contracts. Second, the pace of restocking in India after inventory digestion. If import data remains weak in April and May, it will disprove the "restocking based on immediate demand" hypothesis. Third, the dynamic evolution of the POGO spread—if crude oil prices fall due to geopolitical easing, the biodiesel premium for palm oil will shrink accordingly. In the short term, prices may remain highly volatile in the 4500-4650 ringgit range, with market participants expressing their judgments on the above variables through position sizing rather than directional analysis.
Q: Why did the decline in MPOB inventory in March fail to sustain price increases?
A: Although March inventory decreased by 16.2% month-on-month, the absolute value of 2.267 million tons was significantly higher than the upper limit of the market expectation of 2.18 million tons. Higher-than-expected production (1.377 million tons) and slightly lower-than-expected domestic consumption together led to a pricing result where "the positive factors were less than expected." In addition, export data for the first 10 days of April plummeted by more than 30%, and the market has shifted its focus to the expectation of an inventory inflection point during the production season, meaning the previous positive factors have been fully priced in.
Q: Through what channels does the situation in the Middle East affect palm oil pricing?
A: The transmission chain is as follows: tensions in the Strait of Hormuz → rising crude oil risk premium → improved economics of biodiesel → increased demand expectations for palm oil as a substitute feedstock for biodiesel. Simultaneously, geopolitical uncertainty prompts importing countries to accelerate the establishment of strategic stocks, creating additional precautionary purchasing demand. These two pathways jointly influence both the financial attributes and physical demand for palm oil.
Q: Does the decline in Indian imports mean that demand has turned pessimistic?
A: This needs to be understood in layers. From a price elasticity perspective, high prices have indeed suppressed the immediate purchasing intentions of Indian refiners, reflecting a negative feedback loop between demand and prices. However, from a strategic inventory perspective, Kenanga Investment Bank believes that buyers, due to food security concerns, will maintain their restocking pace over the next one to two quarters. Short-term weak demand and medium-term essential demand support are not contradictory; the timing of the subsequent shift in purchasing pace needs to be monitored.
Q: What is the core focus of the current palm oil market competition?
A: The market is currently caught in a tug-of-war between "geopolitical premium" and "supply and demand realities." Strong crude oil prices provide sentiment support and a lower limit for price movement, but the start of a production increase cycle, weakening export momentum, and the crowding-out effect of high prices on food demand are all factors suppressing upward potential. Short-term price direction depends on which variable shows the most significant marginal change.
Q: What forward-looking indicators should we focus on in the future?
A: First, export forecast data released by shipping agencies every 5 days verifies whether the decline in exports in April has further widened; second, high-frequency production data from MPOA or SPPOMA determines whether the increase in production is in line with or exceeds seasonal patterns; third, changes in the POGO price spread monitor marginal changes in biodiesel demand; fourth, arrival and inventory data from major importing countries (India and China) test the actual absorption capacity of end-consumers.
Geopolitical Pulse: The Transmission Mechanism of Crude Oil Premium to Vegetable Oil
The core driver of today's market rebound stems from renewed tensions in the Middle East. Following the failure of negotiations between the US and Iran in Islamabad, the US Navy's preparations to intercept ships passing through the Strait of Hormuz pushed international crude oil prices back above $100 per barrel. For the palm oil market, the strength of crude oil has directly reshaped the price advantage of biodiesel – the narrowing POGO spread (the price difference between palm oil and gasoline) has significantly improved the economic viability of palm oil as a biodiesel feedstock.
Paramalingam Supramaniam, director of brokerage firm Pelindung Bestari, interpreted this as follows: "The renewed escalation of tensions in the Middle East has reignited buying interest in the market, and traders are re-incorporating risk premiums into the price system after Friday's sharp sell-off." However, Supramaniam immediately warned, "Demand-side constraints and better-than-expected supply performance will limit upside potential in the coming trading days." This assertion accurately captures the current stalemate between bullish and bearish forces in the market—macro-geopolitical premiums and micro-level supply and demand easing are vying for dominance at different timeframes.
Inventory reduction fell short of expectations: the March report's positive news had been fully priced in.
The Malaysian Palm Oil Board's (MPOB) March supply and demand report, released last Friday, formed a significant backdrop to the previous price decline. Data showed that end-March inventories fell 16.2% month-on-month to 2.267 million tons, marking the third consecutive month of decline and reaching a seven-month low. However, this decline was still significantly higher than the upper limit of the previous forecast (market expectations were around 2.18 million tons). The discrepancy stemmed from the combined effect of better-than-expected production (up 7.2% month-on-month to 1.377 million tons) and slightly lower-than-expected domestic consumption.
It is worth noting that exports in March surged 40.6% month-on-month to 1.551 million tons, partly benefiting from the "demand shift" effect of Indonesia's increased export tax rate, and also including concentrated stockpiling before Ramadan. With the production increase cycle approaching, the market expects April output to see double-digit month-on-month growth, while export momentum is unlikely to continue the strength of March – shipping survey agencies estimate that exports in the first 10 days of April will plummet by 30.7% to 38.9% month-on-month, a leading indicator that is putting downward pressure on prices in the longer term. Zhang Rufeng, a senior researcher at COFCO Futures Research Institute specializing in oils and oilseeds, pointed out that Malaysia is entering the production increase season with over 2.2 million tons of inventory, creating relatively clear pressure, and the market is currently speculating on whether an inventory inflection point will form in April and May.
Marginal decay of demand elasticity: India's shrinking imports and the backlash from high prices
The demand side is sending warning signals to the market. Data from the Solvent Extractors Association of India (SEA) shows that India's palm oil imports in March fell by approximately 19% month-on-month to 689,000 tons, the lowest level in three months. Following the global rise in palm oil prices in tandem with the energy market, import profits for Indian refiners have been significantly squeezed, leading to a more cautious purchasing attitude.
This shift reflects a deeper logic: the premium of palm oil over soybean oil is eroding its market share. In India, the world's largest importer of edible oils, the contraction in purchasing by price-sensitive buyers indicates that the negative feedback mechanism of high prices on demand has begun to take effect. Kenanga Investment Bank, in its report, offers a noteworthy perspective—the low elasticity of exports to high prices in March (i.e., price increases did not suppress purchasing) reflects buyers' food security anxieties stemming from the Middle East conflict, with countries excessively building up inventories to hedge against potential supply chain disruptions. The institution thus concludes: "Regardless of whether a ceasefire is reached in the current Middle East conflict, buyers are expected to maintain restocking activity for one to two quarters, and the supporting demand for edible oils will continue."
Public Investment Bank added to the bullish argument from the perspective of regional supply contraction: Thailand and Indonesia's policy orientation of prioritizing domestic biodiesel projects is tightening the availability of regional exports, coupled with the potential weather risks of El Niño, which is expected to provide solid support for CPO prices. The institution maintains its forecast of an average CPO price of 4,400 ringgit/ton for the whole year and gives the plantation sector an "overweight" rating.
Logical Deduction: Rebalancing Premiums and Reality
In summary, the current palm oil pricing system is composed of two intertwined main lines: the first is the energy-vegetable oil transmission chain derived from the situation in the Strait of Hormuz, which provides downward support for prices in terms of sentiment and relative pricing; the second is the supply and demand rebalancing pressure formed by the arrival of the production increase cycle and the suppression of demand by high prices, which restricts the upward elasticity of prices.
The following variables need to be closely monitored going forward: First, whether the April MPOB production data can validate the expected increase in production. If the month-on-month increase significantly exceeds seasonal patterns, the confirmation of an inventory inflection point will put pressure on near-month contracts. Second, the pace of restocking in India after inventory digestion. If import data remains weak in April and May, it will disprove the "restocking based on immediate demand" hypothesis. Third, the dynamic evolution of the POGO spread—if crude oil prices fall due to geopolitical easing, the biodiesel premium for palm oil will shrink accordingly. In the short term, prices may remain highly volatile in the 4500-4650 ringgit range, with market participants expressing their judgments on the above variables through position sizing rather than directional analysis.
Frequently Asked Questions
Q: Why did the decline in MPOB inventory in March fail to sustain price increases?
A: Although March inventory decreased by 16.2% month-on-month, the absolute value of 2.267 million tons was significantly higher than the upper limit of the market expectation of 2.18 million tons. Higher-than-expected production (1.377 million tons) and slightly lower-than-expected domestic consumption together led to a pricing result where "the positive factors were less than expected." In addition, export data for the first 10 days of April plummeted by more than 30%, and the market has shifted its focus to the expectation of an inventory inflection point during the production season, meaning the previous positive factors have been fully priced in.
Q: Through what channels does the situation in the Middle East affect palm oil pricing?
A: The transmission chain is as follows: tensions in the Strait of Hormuz → rising crude oil risk premium → improved economics of biodiesel → increased demand expectations for palm oil as a substitute feedstock for biodiesel. Simultaneously, geopolitical uncertainty prompts importing countries to accelerate the establishment of strategic stocks, creating additional precautionary purchasing demand. These two pathways jointly influence both the financial attributes and physical demand for palm oil.
Q: Does the decline in Indian imports mean that demand has turned pessimistic?
A: This needs to be understood in layers. From a price elasticity perspective, high prices have indeed suppressed the immediate purchasing intentions of Indian refiners, reflecting a negative feedback loop between demand and prices. However, from a strategic inventory perspective, Kenanga Investment Bank believes that buyers, due to food security concerns, will maintain their restocking pace over the next one to two quarters. Short-term weak demand and medium-term essential demand support are not contradictory; the timing of the subsequent shift in purchasing pace needs to be monitored.
Q: What is the core focus of the current palm oil market competition?
A: The market is currently caught in a tug-of-war between "geopolitical premium" and "supply and demand realities." Strong crude oil prices provide sentiment support and a lower limit for price movement, but the start of a production increase cycle, weakening export momentum, and the crowding-out effect of high prices on food demand are all factors suppressing upward potential. Short-term price direction depends on which variable shows the most significant marginal change.
Q: What forward-looking indicators should we focus on in the future?
A: First, export forecast data released by shipping agencies every 5 days verifies whether the decline in exports in April has further widened; second, high-frequency production data from MPOA or SPPOMA determines whether the increase in production is in line with or exceeds seasonal patterns; third, changes in the POGO price spread monitor marginal changes in biodiesel demand; fourth, arrival and inventory data from major importing countries (India and China) test the actual absorption capacity of end-consumers.
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